Over the last year, Gap (NYSE: GPS ) has made massive strides toward increasing performance, and giving more back to investors. If the program of brand rebuilding was the dating portion of Gap's rebound, the executive shift that just took place was Gap popping the question. Good news: It said yes. Now Gap is internally aligned to take advantage of all three of its big brands, and the company's international growth outlook is excellent. Here's a look at what the company has done so far, why this move matters, and what investors should look out for over the next few quarters.
The journey to today
To appreciate where Gap is now, it makes sense to look back to about a year ago, when the company was trading at about half of its current value. When the company reported its September 2011 sales, it was a message of failure. Same-store sales were down 4%, total sales were almost flat on the previous year, and CEO Glenn Murphy said, "While there were some bright spots across our brands and business units, we're clear and focused on the steps necessary to improve our business performance going forward." Starting your discussion with a nod to a few bright spots is bad news.
But true to his word, Murphy and his team did have a plan in place. Step one was rebuilding the Gap brand, and that meant working on the supply chain. Gap was suffering from being behind the curve in the fashion world, releasing styles as they were on the way out. To remedy this, Gap increased its production capacity. That meant that the company could turn out new designs faster, in order to catch the trends it was missing. The company also put new policies in place around materials, to try to regain its former reputation as a quality producer.
The next step was to give the brands new life. Gap, Old Navy, and Banana Republic had all started to lose their hard edges, and the company was unclear on what was a Gap product as opposed to a Banana Republic product. This year, that got sorted out and the brands now have clear lines defining them. In spring, sales started to pick back up, and in September 2012 the company reported same-store sale increasing 6%.
Why the new announcement matters
On Tuesday, Gap announced some changes to its global lineup that are likely to lock in the successes that the company has already started to see. Instead of operating in a location-dependent structure, with executives in place for North America, International, Online, etc., the company will now have one executive per brand overseeing the whole of that brand's global operation. That means that the person managing Banana Republic in the U.S. will be the same person managing the brand online and in Central America.
With the change, Gap is hoping to add even more strength and character to its existing brands. This should be a boon for the company's long-term prospects against very similar competitors like Abercrombie & Fitch (NYSE: ANF ) , or the slightly more upscale Guess? (NYSE: GES ) . In the past few years, Gap has not been able to define itself well enough to match the strong branding that these companies have offered, regardless of location. An Abercrombie store in the U.S. looks like an Abercrombie store in the U.K., and both stores are full of clothes that are distinctly Abercrombie. Now Gap should have that same advantage.
While it's a much smaller portion of the story right now, I think one of the main advantages of this move is that now the company's Athleta and Piperlime brands will have their own executives. Athleta is Gap's answer to lululemon athletica (Nasdaq: LULU ) , and it has seen a great deal of success in its growth. But without a visionary at the helm, the brands have stagnated. Now, Arthur Peck, the current president of Gap North America, is going to manage the brands. Peck led the revival that Gap has seen in the U.S., and his experience will be invaluable to the growth of Gap's smallest brands.
The future of Gap
This is an excellent step forward for the company, and 2013 should prove to be another great year. I'm looking for two things. First, watch the growth of Athleta and Piperlime. The brands have a lot to offer to the Gap portfolio, and with some renewed executive interest, I think they could start to make an impact on the bottom line in 2013. Second, watch for Gap's international expansion. The only role that maintained its local focus was the management of Gap's expansion in China. Murphy is going to be taking a bigger interest in that outcome, and with good reason. International sales continue to fall, even as brand sales increase. If Gap can turn its international business around, it's going to pop.
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